BofI Holding, Inc., et al. v. Houston Municipal Employees Pension System

In Basic Inc. v. Levinson, 485 U.S. 224 (1988), this Court recognized the fraud-on-the-market presumption of reliance for private rights of action brought by investors under Section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5. The fraud-on-the-market presumption is predicated upon the “efficient capital markets hypothesis” (ECMH). The ECMH posits that the market price of a security trading in an efficient stock market reflects all publicly available information, including any misrepresentation, about the issuer of the securities and its business. In Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005), this Court held that in such fraud-on-the-market cases the element of loss causation requires more than a showing that the alleged misrepresentation inflated a security’s market price at the time of the investor’s purchase. An investor-plaintiff also must show that the misrepresentation caused the investor’s economic loss when the “truth beg[an] to leak out” publicly into the efficient market. The questions presented here are:

1. Whether disputed public allegations about an issuer or its business, without any additional corroborating disclosure or event, reveal to an efficient market the “truth” for purposes of establishing loss causation under Dura (as held by the Sixth and Ninth Circuits, in direct conflict with the Eleventh Circuit).

2. Whether allowing a plaintiff to show that a disclosure or event revealed the “truth” about the issuer or its business by pointing to the magnitude of the decline in the price of the issuer’s stock conflicts with Dura and misapplies Basic. 3. Whether the Court should overrule Basic to the extent it recognizes the ECMH, as that economic theory sows confusion in the lower courts with respect to the proper analysis of loss causation.